While many have been declaring that a decline in correlations is heralding the return of a “stock-pickers market”, Investment News’ Jason Kephart says the entire notion of a stock-pickers market is a misconception.
“The problem,” Kephart writes, “is that correlation, which measures how stocks move in relation to each other, doesn’t actually tell you anything about the opportunities available to portfolio managers. Even though correlations between stocks historically have been high, meaning stocks generally have moved in one direction — up — since the market bottomed, that doesn’t mean they’re moving at the same speed.”
According to Kephart, in every year since 2008, more than half the stocks in the S&P 500 have finished the year with a return either 10% greater or 10% lower than the index. That means that, while correlations have been high, there’s been plenty of opportunity for stock-pickers to distinguish themselves from the crowd.
As for the reasons most fund managers have been underperforming the broader market in recent years, Kephart says it has nothing to do with correlations. He says the reason for fund managers’ continual underperformance include “management fees and trading costs, a general unwillingness to make big bets, and the fact that the market is hard to beat without any head winds”.
“This isn’t to say that everyone should be all passive all the time, but when it comes to picking an active manager, their process, their fees, and a long-time horizon should be the biggest factors in choosing them, not whether or not it’s a ‘stock pickers’ market,” he writes. “If you believe in active management, the data show it’s always a “stock pickers” market.”